Educational Articles

Stock Screen: Growth Stocks - July 30, 2012

Kevin Downing
| July 30, 2012

Issues defined as “growth stocks” have a number of common traits, but the most important is that their earnings are expected to grow at a faster pace than the broader market over a period of time. With that in mind, Value Line runs a screen in its Summary and Index that searches for stocks that meet this key criterion. It focuses on issues that have recorded good per-share earnings gains in recent years and that ought to continue to do so in the future, such as ResMed, Inc. (RMD) and Broadcom (BRCM).

To make our list, a company's annual growth of sales, cash flow, earnings, dividends and book value must together have averaged 10% or more over the past 10 years and be expected to average at least 10% in the coming 3-5 years, which is no easy feat considering that this time span included varying rates of economic growth. Below we highlight some of the stocks from our screen with sound investment merit:

ResMed Inc.

ResMed Inc. is a developer, manufacturer, and distributor of medical equipment for treating, diagnosing, and managing sleep-disordered breathing (SDB) and other respiratory disorders. The company was formed in 1989 to commercialize a new treatment for obstructive sleep apnea (OSA), called continuous positive airway pressure (CPAP), whereby pressurized air is delivered to prevent the collapse of the upper airway during sleep. Since its inception, the company has added substantially to its product pipeline treating SDB, and offers a number of innovative tools such as airflow generators, diagnostic products, mask systems, headgear, and other accessories.

ResMed has grown through a combination of geographic expansion, increased awareness of respiratory conditions, and its research and product development efforts. The company operates as one unit, given its single market focus and the interdependence of its products. It sells its devices in over 70 countries through a combination of wholly owned subsidiaries and independent distributors.

The company appears focused on expanding its portfolio of devices for the treatment of sleep apnea. Its new product, The Narval CC keeps the lower jaw in a forward position which brings forward the base of the tongue and increases the space behind the tongue. This reduces the risk of obstruction or collapse of the airway, and decreases the frequency of apnoeas or hypopnoea which lead to sleep disruptions. Also, the speed at which air is inhaled decreases, which reduces snoring. The company will attempt to get dentists to recommend the product and is currently seeking a Medicare reimbursement code.

It is estimated that one in five adults suffers from some form of OSA, representing 40 million people in the United States alone. However, because of a general lack of awareness among the public and the medical community, it is thought that less than 10% of those have been diagnosed or treated. Therefore, as consciousness of sleep conditions becomes more widespread, there is ample room for solid market growth down the line, in our view.

Broadcom

Broadcom is a leading designer of semiconductors for wired and wireless communication devices. Its products deliver voice, video, data and multimedia connectivity in the home, the office and the mobile environment. Functions of its semiconductors include complex signal processing, converting digital data to and from analog signals, and switching and routing packets of information over IP-based networks. The company operates in three segments as per its 10-K:

The company reported solid June-quarter results, with revenues advancing 8% sequentially and 10% on a year-over-year basis. This was toward the high end of guidance. The Mobile and Wireless segment contributed 46% of revenues and was up a stronger-than-expected 3% sequentially, thanks to growth in its bread and butter, Wi-Fi combo chips. Sales of 3G basebands (cellular modem) also did well thanks to continued design wins from Samsung and China Unicom. This strength more than offset softness in 2G basebands sold to its primary customer Nokia (NOK).

Broadcom has started to receive orders for a new chipset that includes Wi-Fi, Bluetooth, GPS, and a relatively new technology, Near Field Communications. NFC allows for mobile payments and exchange of information over very short distances between compatible devices. This technology should begin ramping up in the second half of 2012. We believe new mobile devices slated to be released before the holidays will benefit results in the current quarter.

Broadcom appears to be growing faster than the broader semiconductor industry because it plays in attractive markets like Passive Optical Networks, data centers, and smartphones. The percentage of Wi-Fi chipsets used in smartphones continues to increase thanks largely to greater sales of low-end devices. We believe broadcom has a six-month lead on 802.11ac Wi-Fi chipsets, which it claims are three times faster, have twice the range, and are six times more power efficient than predecessors. We expect these trends to continue helping the company grow its top and bottom lines for the foreseeable future.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.